Helping clients manage cash windfalls

On the surface, it might seem like a dramatic example of rampant overspending. It should, however, reinforce the role you can play in helping clients manage the complexities that come with a sudden cornucopia of cash, says Bill Brown, senior vice-president and managing director, national sales manager with BMO Nesbitt Burns, in Toronto.

“Clients [who receive such windfalls] don’t know what they don’t know,” says Brown. “[Your] job is to establish a structure – to point out problems to make sure the client’s needs can be accommodated both now and in the future.”

In order to do that, Brown offers some tips on how you can help a client who is the recipient of a cash windfall:

> Define the need
You work with clients who are willing to pay for your advice. But do all your clients understand the value of your advice?

Not always, says Brown.

“I think the missing piece for someone who comes into money all of a sudden might be that they [don’t] understand the value of advice,” says Brown. “That can be a downfall.”

In order to prevent that from happening, Brown recommends you provide an overview of the different kinds of wealth planning options that would be helpful to clients of a cash windfall.

For example, provide your client with an overview of estate and tax planning strategies, such as spousal loans or family trusts, much like you would with any high-net worth individual. This will help show your client how they can maintain and build upon their cash windfall.

> Ask a lot of questions
Before setting out on crafting a financial plan, take the time to talk to your client about their goals. The best way to do this, Brown says, is to ask your client plenty of questions.

For example, he says you want to discover what the windfall means to that client and what they hope to achieve with their newfound wealth.

“It’s a simple question that every advisor should ask their client,” says Brown. “Ask them, ‘what is the money for?'”

From there, you should be well positioned to determine if the client’s “wish list” is attainable or if you need to help them better prioritize their goals before creating a long-term financial plan.

> Compartmentalize capital
An effective strategy to help your client visualize the limitations of their newfound wealth is to compartmentalize the client’s capital.

Based on the questions you have already posed, pull out a handful of themes that would be relevant to your client. Let them allocate the amounts to each category.

Some of the most common themes could be, for example: lifestyle, capital expenditures (such as houses, cars, boats or other large purchases), helping friends and family, philanthropy and estate, says Brown.

This will be a helpful and straightforward way to illustrate for your clients whether their wish list is attainable. It will also be a helpful exercise for you because it will give you insight as to whether other advanced professional services might be needed.

> Educate your clients
At the macro level, you have a role to play in helping your clients establish a good relationship with money.

For example, if the client of a cash windfall decides to quit their job and enter early retirement, make sure they are financially literate.

Be sure to explain what reasonable rates of return might be and how the real value of money can be affected by inflation, says Brown.

Obviously, all this won’t apply to all clients of a cash windfall. But it’s better to be safe than sorry.

You don’t want your clients to join the legions of professional athletes or celebrities who have piddled away their wealth on a few magic beans.